Increasing Our Bets on a Global Recovery

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Overnight, the China data continued to improve. After you have received this Alert, we'll add to our positions in Emerson Electric (EMR), MasterCard and Goldman Sachs (GS).

We are also watching the Vanguard MSCI Europe ETF (VGK) with the idea of adding that to the portfolio. Not only is China in recovery mode, Europe has clearly stabilized and could be the real wild card into 2013.

The China flash factory purchasing managers' index was at 50.9, the highest in 14 months and the fifth consecutive monthly gain. New orders rose to 52.7, also a fifth consecutive monthly rise. Exports continued to be weak, pretty much as advertised from the trade data earlier this week, and this is a reason for China's new leadership to keep an accommodative stance to its monetary policy.

Emerson Electric has the most exposure to emerging markets at 30%, and management has aggressive goals to continue to increase this over time. That, coupled with continued momentum in Process Management and the possible sale of its Network Power division, are reasons we want to make this a bigger position. But most impressive is management's ability to improve margins and profitability in the face of a challenging macro situation.

MasterCard and Goldman Sachs are two new positions that we want to build out that also offer international exposure -- MasterCard gets 60.4% of its revenue overseas, and Goldman gets 38% from overseas. We like MasterCard for the secular growth in credit cards as consumers shift the way they spend from paper to plastic, and also for its ability to capture market share internationally. Goldman's shares are cheap at 0.9x tangible book value, and we see the return on equity at a trough. Since it has a strong balance sheet and solid market-share positioning, we expect further buyback announcements and a possible dividend increase (but we expect its dividend boost to be less than those of its peers, as it is more focused on buying its shares below tangible book).

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